The Side Effects of Hostelworld's Elevate
There has been much chatter in the hostel community coming from the ever-increasingly popular gem of Eastern Europe, Budapest. Its boom in popularity has attracted many new hostels to the space, raising the competition, and many of the players have turned to Hostelworld’s Elevate program for a competitive edge. Now many are realizing only Hostelworld is winning in this game.
The simple but sad truth about the Elevate program has its largest impact when a few players opt in... and little impact when many players opt in, except for Hostelworld's revenues.
The Truth of Elevate
The simple but sad truth about the Elevate program is that it has its largest impact when a few players opt in, and like currently in Budapest, has little impact when many players opt in. All it does is create an internal price war, keeping the average bed rate (ABR) low for the guest while raising the costs of obtaining the customer on the supplier side. Angry Budapest operators are furious that their community is boosting its commission rate upwards of 20%.
Don’t Blame the Big Guys
Operators are blaming the big hostels for the boost, but I’m inclined to point the finger at the small guys. Big hostels operate at higher cost structures than their smaller counterparts. In a city like Budapest, costs go up exponentially with size, regardless of scales of operation. Basically, the big guys cannot hide from government regulators and pay more in regulations, inspections, licenses, consultants, accountants, lawyers, and even local mafia fees (if they have a bar). That makes profit margins small in a city with a value-added tax (VAT) of 27%. Instead of adding even more operational costs, they focus on group bookings and branding to make it through the shoulder season. The smaller hostels have a competitive advantage here; they don’t have to pay for many of those costs. Usually, if they have a business license and pay some sort of VAT while cooking their books, they’re fine. In the rare case when an inspection occurs, the optional bribe is cheaper than going fully legit, even knowing the inspector will return for another bribe in the future. This leaves more margins to raise the commission stakes.
If You Must, Booking Does it Not-So-Bad
Booking.com has been doing “Commission Override” long before Hostelworld launched its Elevate program. Although the concept is similar, the outcome is different because they took a solution-oriented approach, keeping their partners in mind. First off, their “rank,” or where your hostel shows on the page compared to others, is much more complex than Hostelworld. Let’s just say it is conversion-driven because that is a complex issue worth writing about in itself. With this commission override, you actually choose the commission you are willing to pay for specific dates in a box similar to loading your daily rate. A reservations or revenue manager would anticipate some slumps and offer more commission (from 15-30%) to start filling the rooms well in advance, as they should. They can change it accordingly as the pacing changes, either lowering it as they get more bookings or raising it to attract more bookings. This commission-boosting gives the operators more strategic value than Hostelworld’s opt-in, opt-out feature, which creates a frenzy for an extended period of time.
The Winners Don’t Even Play the Game
We all know the true winners of a price war are the customers, and the winner of an internal commission war would be Hostelworld, but the real winners, in my book, are the ones deciding not to play the game. It takes much planning, dedication, and hard work to get to a position in order not to do so, and Retox does just that. Retox and their partners have focused on the party hostel vibe for years. They emphasize their guest experience, generating much content, social media, and word-of-mouth marketing that keeps their beds full. Of course, they have a team working on it all, but I assure you, if someone were able to take a “net promoter score" of all the hostels in Eastern Europe, Retox would be among the highest. So, like Retox, by focusing on your brand and your customer experience, you are only helping yourself in the long run. This is one of the best ways to reduce reliance on any one distribution channel.